Level: HOTS (KBAT)
HOTS (KBAT) Worked Examples: Accounting for Companies Limited by Shares
Six graded higher-order examples testing analysis of share issues, owner's equity, and the calculation and interpretation of cash dividends, including the cumulative rights of preference shareholders in companies limited by shares.
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Example 1: Oversubscription: Allotment and Refund
Question
Solution plan
This is an oversubscription (applications exceed the offer). Issued and fully paid-up capital = shares allotted x issue price = 500,000 x RM1.50. The excess = (applications - allotment) x price = 120,000 x RM1.50 is refunded to applicants. All cash for allotted shares is credited to the Ordinary Share Capital account, since shares have no nominal value (no share premium account under the 2016 Act).
| Particulars | No. of Shares | Price per Unit (RM) | Amount (RM) |
|---|---|---|---|
| Ordinary shares offered | 500,000 | 1.50 | 750,000 |
| Applications received | 620,000 | 1.50 | 930,000 |
| Shares allotted (issued & fully paid-up capital) | 500,000 | 1.50 | 750,000 |
| Excess application money refunded | 120,000 | 1.50 | 180,000 |
Answer
Issued and fully paid-up capital is RM750,000 (500,000 x RM1.50). The total refunded to unsuccessful applicants is RM180,000 (120,000 x RM1.50). The proper action for oversubscription is to allot proportionately or cap the allotment and refund the excess application money.
Where marks are usually lost
Example 2: Issue of Two Share Types: General Journal and Ledger
Question
Solution plan
Cash received increases the asset Bank, so debit Bank. Share capital (equity) increases, so credit each share capital account. Each share type needs a separate capital account: Ordinary Share Capital (600,000 x RM1.00) and Preference Share Capital (200,000 x RM2.00). Post to ledgers: Bank (debit side), Ordinary Share Capital and Preference Share Capital (credit side).
| Particulars | Debit (RM) | Credit (RM) |
|---|---|---|
| Bank | 600,000 | |
| Ordinary Share Capital | 600,000 | |
| (Issue of 600,000 ordinary shares at RM1.00) | ||
| Bank | 400,000 | |
| Preference Share Capital | 400,000 | |
| (Issue of 200,000 8% preference shares at RM2.00) | ||
| Total | 1,000,000 | 1,000,000 |
| Particulars (Dr) | RM | Particulars (Cr) | RM |
|---|---|---|---|
| Ordinary Share Capital | 600,000 | Balance c/d | 1,000,000 |
| Preference Share Capital | 400,000 | ||
| 1,000,000 | 1,000,000 |
Left = debit; right = credit.
| Particulars (Dr) | RM | Particulars (Cr) | RM |
|---|---|---|---|
| Balance c/d | 600,000 | Bank | 600,000 |
| Particulars (Dr) | RM | Particulars (Cr) | RM |
|---|---|---|---|
| Balance c/d | 400,000 | Bank | 400,000 |
Answer
Total money received through the bank is RM1,000,000 (RM600,000 ordinary + RM400,000 preference). Ordinary Share Capital shows a credit balance of RM600,000 and Preference Share Capital a credit balance of RM400,000. The journal balances: debit RM1,000,000 = credit RM1,000,000.
Where marks are usually lost
Example 3: Owner's Equity: Statement and Entity Comparison
Question
Solution plan
A company's owner's equity comprises share capital (ordinary + preference) and reserves (retained profit reserve + general reserve). Sum all components. Compare: sole proprietor = Capital + Net Profit - Drawings; partnership = each partner's Capital Account + Current Account; company = Share Capital + Reserves (no drawings; distribution to owners is via dividends).
| Particulars | RM |
|---|---|
| Owner's Equity | |
| Ordinary Share Capital | 1,000,000 |
| 6% Preference Share Capital | 500,000 |
| Retained Profit Reserve | 250,000 |
| General Reserve | 80,000 |
| Total Owner's Equity | 1,830,000 |
| Type of Entity | Owner's Equity Components |
|---|---|
| Sole Proprietorship | Capital + Net Profit - Drawings |
| Partnership | Each partner's Capital Account + Current Account |
| Company Limited by Shares | Share Capital (ordinary + preference) + Reserves |
Answer
Total Owner's Equity is RM1,830,000 (RM1,000,000 + RM500,000 + RM250,000 + RM80,000). Unlike a sole proprietorship or partnership, a company's equity has no drawings account; profits are retained as reserves and distributed to shareholders as dividends.
Where marks are usually lost
Example 4: Interim, Final and Preference Dividends
Question
Solution plan
The preference dividend is a percentage of paid-up preference capital: 6% x RM800,000. Ordinary dividends are in sen per share: interim (paid during the year) = 2,000,000 x RM0.03; final (declared at year end) = 2,000,000 x RM0.05. Sum the ordinary dividends, then add the preference dividend for the total.
| Particulars | Basis of Computation | Amount (RM) |
|---|---|---|
| 6% preference dividend | 6% x RM800,000 | 48,000 |
| Interim ordinary dividend | 2,000,000 x RM0.03 | 60,000 |
| Final ordinary dividend | 2,000,000 x RM0.05 | 100,000 |
| Total ordinary dividend | 160,000 | |
| Total dividend | 208,000 |
Answer
The preference dividend is RM48,000. The ordinary dividend is RM160,000 (interim RM60,000 + final RM100,000). The total dividend is RM208,000. The interim dividend is paid during the period based on expected profit, while the final dividend is declared at year end once profit is known.
Where marks are usually lost
Example 5: Cumulative Preference Shares: Dividends in Arrears Over Several Years
Question
Solution plan
Annual preference dividend = 7% x RM600,000 = RM42,000. Because the shares are cumulative, unpaid dividends (2021, 2022, 2023) accumulate as arrears and must be paid first when profit is sufficient. Arrears to 2023 = 3 x RM42,000. In 2024: pay arrears + current preference dividend, then the ordinary dividend (1,000,000 x RM0.05). Preference dividends must be settled before ordinary dividends.
| Year | Annual Preference Dividend (RM) | Paid (RM) | Cumulative Arrears (RM) |
|---|---|---|---|
| 2021 | 42,000 | 0 | 42,000 |
| 2022 | 42,000 | 0 | 84,000 |
| 2023 | 42,000 | 0 | 126,000 |
| Particulars | RM |
|---|---|
| Preference dividend arrears (2021-2023) | 126,000 |
| Current-year preference dividend (2024) | 42,000 |
| Total preference dividend paid 2024 | 168,000 |
| Ordinary dividend (1,000,000 x RM0.05) | 50,000 |
| Total dividend paid 2024 | 218,000 |
Answer
The annual preference dividend is RM42,000. Cumulative arrears to 2023 are RM126,000 (3 years x RM42,000). In 2024 the company pays RM168,000 to preference shareholders (arrears RM126,000 + current RM42,000) and RM50,000 to ordinary shareholders, giving a 2024 total dividend of RM218,000.
Where marks are usually lost
Example 6: Evaluation and Correction: Priority of Dividend Distribution
Question
Solution plan
Cik Farah's proposal is wrong because cumulative preference shareholders are entitled to all arrears plus the current dividend before any ordinary dividend is paid. Annual preference dividend = 8% x RM500,000 = RM40,000. Arrears for 2022 and 2023 = 2 x RM40,000 = RM80,000. Correct distribution: preference arrears RM80,000 + current preference RM40,000 = RM120,000 first; remaining RM200,000 - RM120,000 = RM80,000 for ordinary; ordinary dividend per share = RM80,000 / 1,600,000 = RM0.05 (5 sen).
| Particulars | RM |
|---|---|
| Distributable profit 2024 | 200,000 |
| Less: Preference dividend arrears (2022-2023) | 80,000 |
| Less: Current preference dividend (2024) | 40,000 |
| Balance for ordinary shareholders | 80,000 |
| Ordinary dividend (1,600,000 x RM0.05) | 80,000 |
| Retained profit remaining | 0 |
Answer
Cik Farah's proposal is incorrect: cumulative preference shareholders must be paid first, including arrears of RM80,000 and the current dividend of RM40,000. The correct distribution is RM120,000 to preference shareholders and the remaining RM80,000 to ordinary shareholders (5 sen per share, not 7.5 sen). The full RM200,000 of distributable profit is distributed.
Where marks are usually lost
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